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Choice of Business Entity

Alice and Bill plan to go into business together. They anticipate losses in the first two or three years, which they would like to use to offset income from other sources. They also are concerned about exposing their personal assets to business liabilities.

Advise Alice and Bill as to what business form would best meet their needs.

Solution Preview

There are generally four types of business entities in the United States: sole proprietorships, partnerships, limited liability companies (and their many permutations) and corporations. Shareholders of certain small corporations may opt to be taxed as sole proprietorships or partnerships while retaining their legal status as corporations.

Because the entity will contain two partners, it cannot be a sole proprietorship; by definition, these entities have only one owner. Further, at least one partner in a partnership must be a general partner. Because general partners have unlimited liability for partnership debts, either Alice or Bill will expose her or his personal assets to the business's creditors.

A C corporation, or corporation which is taxed as a separate legal entity from its owners, will shield the shareholders from business liabilities (provided they have not committed negligence, fraud or any other malfeasance). However, they will have to observe ...

Solution Summary

This solution presents a comprehensive discussion of the advantages and disadvantages of different business entities, particularly regarding taxes and the owner's personal liability for business debts.

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